Earnings Per Share: This is Just the Beginning

To most people, earnings per share seems like financial jargon intended to speak over the heads of “regular people”. Largely, the professional financial community tends to make investing unnecessarily difficult. Investing doesn’t have to be nearly as difficult as someone might think. Let me break it down for you. Let’s start with EPS which is one of the most important foundational blocks of all investing. Here we go.

(1) What is Earnings Per Share?

At the core, earnings per share (EPS) is exactly what it sounds like. EPS is the amount of money that the company expects to make for every share that is outstanding (shares that people own).

There is a specific formula that is used to calculate EPS. You don’t need to memorize it because EPS is something that you can easily look up but it is important to know what goes (and does not go) into it.

Earnings Per Share = 

(Net Profit – Dividends +/- Extraordinary Items) /

Shares Outstanding

Net Profit = The amount of profit the company made in a given time period.

Dividends = Explanation can be found here.

Extraordinary Items = Weird expenses or revenues that a company normally doesn’t have such as purchasing land to build a new building, selling a portion of the business, etc.

Shares Outstanding = The number of common shares that are owned by people, businesses, organizations, etc.

Like I said, you don’t have to memorize the formula to be a successful investor but it is important to intuitively know what goes into it. 

(2) Why is Earnings Per Share important?

EPS is important because it gives us all a starting point to start comparing companies. Earnings per share is one of the building blocks to have to come up with various investment ratios such as the P/E ratio, ROE, debt to capital, interest coverage ratio, etc.

You cannot begin to make an informed investment decision until you know and understand EPS.

(3) What Earnings Per Share CANNOT Do

Earnings per share cannot tell you if one company is better to invest in than another. Let’s look at a couple companies as examples.

Amazon EPS: 64.81

Apple EPS: 6.01

Does this mean that Amazon is a better investment than Apple? Not necessarily. EPS does not account for risk, risk tolerance, debt load, share price, or a whole host of other factors. 

The point is, do not make an investment decision on EPS alone. You have to do more research to come to a more informed decision.

Making an investment decision on EPS alone is like choosing the person you will marry based on the color of their shirt. 

Their shirt can change tomorrow and there are a whole lot of other factors to consider before you get married.

Final Thoughts

EPS is one of the most fundamental topics in all of finance. In order to make good investment decisions you NEED to understand how it works. 

If you don’t want to get into the weeds about investing that is totally fine also! Most of my portfolio consists primarily of mutual funds, index funds, and ETFs. The nice thing about them is that they do the work for you!

I am here to help with your personal finance journey. 🙂

This is just one more piece of the puzzle.

Until next time!